Nike Q3 Profit, Sales Increase But Margin Narrows

Beaverton, OR—Nike Inc. posted Thursday a 7% increase in its quarter three profit thanks to sales increases—particularly in North America. Nonetheless, the company said it gross margins were squeezed, a situation that should improve as the company capitalizes on this year’s Olympic Games.

For the quarter ended Feb. 29, Nike’s net income rose to $560 million, or $1.20 a share, compared with $523 million, or $1.10 a share, in last year’s third quarter.

Net sales rose 15% to $5.85 billion. Sales in North America, its largest market, were up 17%, Western Europe was up 4%, Central and Eastern Europe up 9%, China up 25% and other emerging markets rose 23%

The report beat analysts’ average estimate for $1.17 a share on sales of $5.82 billion.

Despite the sales growth across most geographic regions, the company’s gross margin again slipped for the fifth straight quarter. Gross margin narrowed to 43.8% from 45.8% as higher costs, including labor, continue to offset price increases.

But Nike added that it expects margins to be down 1 percentage point in the current quarter, too.

Nike noted that its spring orders are 15% ahead of those from a year ago, bolstered in part by demand leading up to the Summer Olympics in London and the European soccer championships in June.

Margin Pressure Continues

“I believe there is some stability easing into the broader marketplace as consumer confidence moves higher in most parts of the world,” Mike Parker, ceo, said. “Our timing is great as we head into an exciting season of sport that starts in a few days with the Final Four in the NCAA basketball championships, and then builds towards the Olympics and Euro champs,” said Parker. “These are the moments we love.”

Nevertheless, analysts’ disappointment with the gross margin drop sent shares of Nike down in trading earlier today.

“We didn’t like the gross-margin pressure,” commented Hedgeye analyst Brian McGough. “It’s uncharacteristic for Nike to miss on the gross-margin line given that it has such great visibility into its supply and demand as far as six months out.”

Furthermore, noting that its other brands, including Umbro, Hurley and Cole Haan, posted an 8% drop in sales.

For its fourth quarter, Nike predicted its sales would rise in the low double digits.

“Looking to the fourth quarter and beyond, we will see continued challenges from the global economy, mostly around unemployment, debt and currency issues brought on by political uncertainty,” Parker told analysts on a conference call. “While some raw material costs are starting to ease, we have not seen them retreat to their previous levels. For other input costs, such as labor, upward pressure continues.”